If you’re looking for how the housing market double-dip will be created, here’s the answer. Never mind the endless taxpayer-backed money-pits of FHA, Fannie and Freddie: Here comes a proposal to grant defaulting homeowners the “right” to rent their homes for five years.
It’s called H.R. 5028 and it’s no joke. The “Right to Rent” bill drafted before Congress meets with the approval of the Center of Economic Policy and Research, a think-tank that believes home “ownership may not be the smartest option.” Not that such thinking in Washington should come as news to our readers, since we’ve reported that none other than FHA’s Director Donovan has made similar statements in recent months.
But now we’re talking potential legislation.
According to HousingWire, the bill would grant the right to homeowners entering foreclosure to occupy their homes for up to five years, making fair-market rent payments, determined by an independent appraiser, to the lender. The CEPR says this would give homeowners important “security” since they would not be “thrown out on the streets.” CEPR cites the cost savings to “homeowners” who would be able to rent their homes rather than face evictions and have to rent on the open market.
REALTORS should be horrified.
If you wanted to prolong the housing recovery, undermine lender confidence, delay eventual foreclosures and fundamentally rewrite the basic contract laws of mortgage lending in the country, then perhaps no measure could do more harm than H.R. 5028. If enacted, it will not only cause a double dip. It will freeze credit, scare away investors and move us far beyond a “double dip” right into a full blown economic depression.
There are many reasons this bill should be opposed by real estate professionals, lenders and home owners. Just in case the National Association of REALTORS needs a few bullet points for its policy opposition statement, we’ll offer them here:
- Granting the right to “occupy” a home to former borrowers who have defaulted on their mortgage abrogates the property rights of the lien holder. Essentially, you will have nationalized housing and transferred ownership from the legal title holders to squatters. It doesn’t matter that they will be paying rent. The basic right to control and dispose of the property by the legal owner will be violated. While the mortgage holder could still sell the property, the future buyer would have to agree to purchase with tenants included. Property ownership will cease to have real meaning in the eyes of the law.
- On multiple levels, home owners will be transformed without their consent. This will fundamentally rewrite their capital positions overnight, alter their net worth and skew their tax positions. Rather than having an option to sell at a loss, or leave the property empty (they may not wish to be landlords), property owners will suddenly become contractually obligated “brother’s keeper” for thousands of other people in society. According to the bill, the “tenants” could not be evicted by the property owner as long as they keep paying their rent. Furthermore, the rental amount will be set by a third party (an appraiser) not by the property owner. Haven’t we seen this rent-control scheme before? Consider both the owner’s property rights – and his personal liberty – temporarily revoked.
- Further attempts by government to delay or repeal the fundamental economic laws of supply and demand merely put off the day of reckoning. The bill’s proponents engage in wishful thinking that it makes more sense to rent properties rather than sell at a loss and clear them from the lenders’ balance sheets through the normal foreclosure process. Their only hope is that the market “might” be better five years from now, when they (presumably) could evict the renters and sell the property for a higher price than they might today. They forget the expenses (and losses) that could be incurred during that time, including costs of making a home rental-law compliant, maintenance and management services. And they are conveniently forgetting about inflation: Selling a home five years from now with future dollars worth less than today is not a formula for increasing economic prosperity. Note that the price of gold flirted with $1300 an ounce today.
- Just recently in June, the CEPR appeared to be lecturing Fannie Mae on the wisdom of punishing strategic defaulters. Thus, they are entirely consistent in their support for a “right to rent” bill, since it would not only reward strategic defaulters, but encourage them. Granting non-owners (i.e. former mortgage payers) the right to occupy a property for a period of time (a right not granted to ordinary renters in the same marketplace) removes the moral public sanction of strategic defaults. It also eliminates the ordinary pain that defaulters incur – the costs involved in moving – that are key market pricing mechanisms that keep many consumers from simply walking away.
- The real estate industry would suffer immeasurable further losses of sales and income overnight. While few real estate brokers are getting rich servicing short sales these days, the process at least creates a minimal cash flow to the commission-income based industry. Instantly transferring millions of homes off the market – by turning them into rental properties – will eliminate a vast source of potential sales over the next five years. Nearly one million real estate professionals would suddenly find fewer transaction opportunities in their local markets. Furthermore, the sudden and rapid elimination of lower priced (distressed) properties for sale would cause an immediate jump in home prices for remaining privately-0wned properties for sale. While initially REALTORS might think this beneficial, they would soon realize that increased property prices mean decreased home affordability for buyers who will continue to face stringent lending standards, lower income and rising unemployment. The brokerage business would blip up for a few months, then collapse as millions of homes that might have been sold once or even twice in the next five years were suddenly locked up in government-granted rental contracts.
We could go on, but the point is likely clear. Any plan that begins by abrogating the rights of mortgage holders to receive their assets back when borrowers cannot make their payments and dispose of it as they see fit is, by any other name, nationalization of the housing market. Banks’ response would be instant and simple: All mortgage lending would stop. If cars can be repossessed but houses cannot, banks will not lend large sums on in “unsecured” lending conditions. Any attempt to argue the measures would be merely temporary – only five years – is disingenuous: Such consumer “rights” are rarely repealed by government once the public sinks its teeth into a free lunch.
Ultimately, H.R. 5028 isn’t about the right of people not to be thrown out into the streets. It’s about transferring the rights of one group – property owners – to others – mortgage defaulters. For an industry built around a single fundamental idea – the right to own your own home – REALTORS should be deeply concerned that an idea like this could even make it to the drafting stage in Congress.
Then again, we’ve seen other industries nationalized in the last two years in America – cars, health care, student loans. What’s to say the government’s solution to the housing market will be any different?